WILL THE MCA ISSUE FURTHER CLARIFICATION
OR REMOVAL OF DOUBT ON SECTION 2(76)
(IV) OF THE 2013 ACT AS REGARDS TO RELATED PARTY TRANSACTIONS AS IT CREATES
AMBIGUITY AND ACT AS AN ANOMALY?
The Ministry of Corporate Affairs ("MCA")
notified on June 5, 2015 that certain provisions of the Companies Act, 2013
("2013 Act") shall not apply to private limited companies or shall
apply with such exceptions or modifications as directed in the notification
(the "Notification").
The above
MCA notification dated exempts private limited companies from the following
provisions of the Companies Act as regards to related party transactions (RTP).
Exemption is given to Section 2(76) (viii) of CA
2013. 2(76) “related party”, with reference to a company, means—
(viii) Any company which is—
(a) A holding, subsidiary or an associate company
of such company; or
(b) A subsidiary of a holding company to which it
is also a subsidiary;
Exemption is
given private limited companies to section 188 (1) which states
188. Related party transactions
(1) Except with the consent of the Board of
Directors given by a resolution at a
meeting of the Board and subject to such conditions
as may be prescribed, no company shall
enter into any contract or arrangement with a
related party with respect to—
(a) Sale, purchase or supply of any goods or
materials;
(b) Selling or otherwise disposing of, or buying,
property of any kind;
(c) Leasing of property of any kind;
(d) Availing or rendering of any services;
(e) Appointment of any agent for purchase or sale
of goods, materials, services
or property;
(f) Such related party's appointment to any office
or place of profit in the company, its subsidiary company or associate company;
and
Due to the above exemptions of section 2(76)(viii)
and Section 188 (1) of CA 2013, now, private limited companies shall not be
required to obtain the approval of the board or the shareholders, for the
purpose of entering into a contract/ arrangement with a Group Company.
The above notification states that, in relation to
a private company, the entities specified in Section 2(76)(viii) of the 2013
Act (i.e., the Group Companies) would not be considered related parties for the
purposes of Section 188.
Further,
this exemption will permit members of the company interested in the contract/
arrangement to vote on the resolution for authorizing the related party
transaction.
Since the Notification does not exempt private companies from the
applicability of Section 2(76) (iv) of the 2013 Act, if the directors or
members in one private company are directors or members in another private
company, a transaction between the two such companies would be considered as a
related party transaction despite the exemption granted from Section 2(76) (viii)
as no exemption is granted for the applicability of Section 2(76) (iv) of the
2013 Act to private limited companies
This is clearly an anomaly. While exempting private
companies from the related party transactions but not providing exemption to
section 2(76) (iv) of the 2013 Act results in ambiguity as the directors or
members in one private company are directors or members in another private
company, a transaction between the two such companies would be considered as a
related party transaction despite the exemption granted from Section 2(76)
(viii).
Will the MCA and Government come forward to issue
clarification or removal of doubt about the exemption of section 2(76) (iv) of
the 2013 Act for the purpose of related party transactions as this will remove
the confusion and offers more clarity to the business community .
